Letter from the Chairman
of the Board of Executive Directors

Dear Shareholder,

I am occasionally asked: Can a chemical company really be sustainable? It often comes out in the course of the conversation that many people equate “sustainable” with “environmentally friendly.” In fact, this is only one part of sustainability. Sustainability also encompasses economic and social aspects, making it much more complex. In this report, you can follow BASF’s progress in the area of sustainability.

First, let’s take a look at the economic figures: In 2013, we were able to increase sales and earnings compared with the previous year, thus attaining our goal. It was a demanding year, with a lot of headwind for the industry. This was compounded by considerably negative currency effects in numerous emerging markets and in Japan. Nevertheless, we sold more, worked more closely together with our customers and enhanced our portfolio. This is the accomplishment of our team, our employees, for which I offer my heartfelt thanks – both from myself and on behalf of my colleagues on the Board of Executive Directors.

The price of BASF shares grew by 9%, reaching €77.49 at the end of 2013. We once again propose a dividend increase, raising it by €0.10 to €2.70. This represents a dividend yield of 3.48%.

How does chemistry help people and the environment?

With our corporate purpose, “We create chemistry for a sustainable future,” we express what BASF stands for. Both with and for our customers, we develop and produce new products and solutions for a growing world population while conserving our resources as much as possible. Science, research and development are needed – and chemistry has to take on this responsibility, as it supplies almost all sectors of industry.

BASF has been occupied with getting more out of existing resources since its founding in 1865. The entrepreneur Friedrich Engelhorn used coal tar, a waste product, to produce aniline and a red dye called fuchsine. Using a by-product as a raw material for something else – this was the idea that eventually led to large, highly efficient chemical production sites in Europe, Asia, and North and South America over the course of our nearly 150-year history. We are working to further increase the sustainability of our processes everywhere. For example, in 2013 we strengthened our position in the field of enzymes. As biocatalysts, enzymes either start or accelerate chemical processes. This saves energy and costs.

We are also already producing products from renewable resources, although with a discerning eye: Not everything that regrows is also sustainable. We want to increase the proportion of renewable raw materials, where feasible. This means developing new methods and then taking them from the laboratory to production. One example is a technology from the American company, Renmatix, for producing industrial sugar from wood, agricultural waste or straw. We are working closely together to continue developing this method.

And yet renewable raw materials will not be able to replace fossil ones. Natural gas and crude oil will remain the dominant energy sources and raw materials worldwide. More people in the world need more energy. This is why we are refocusing and constantly expanding our oil and gas business. We consider it important to utilize new sources and produce oil and gas. Our gas trading and storage business will be taken over by our long-time partner, Gazprom. We signed the contract in December. In return, we are receiving shares in natural gas and condensate fields in Western Siberia. We also increased our production in Norway through the acquisition of assets from Statoil. This had a positive effect on our earnings and cash flow.

Inventiveness, a passion for innovation, customer orientation, awareness of costs, and drive – these are all critical factors for our success. And yet competitive raw material and energy costs are also essential.

A few years ago, there was a fear that fossil fuels would become globally scarce and increasingly costly. Neither has occurred. On the contrary: The United States relies on economical shale gas, and China on inexpensive coal. Only in Europe – and especially in Germany – are energy costs on the rise due mainly to regulatory intervention. This poses an increasing problem for energy-intensive industries. No customer will pay a higher price for a standard product on the worldwide market just because energy is expensive in Europe. You can read about the results of these developments in this report: In the next five years, BASF will invest proportionally less in Europe, reducing its stake to under 50%. This shows how attractive Asia has become – and the United States, as well – for our basic products, and that Europe’s competitiveness is declining.

Where does the road lead in 2014?

„We will concentrate on what we do best: researching, developing and offering our customers attractive solutions.“

We do not expect strong tailwinds this year, either. Nevertheless, we are cautiously optimistic with regard to economic development. Our goal is to once again increase our earnings. To do so, we will concentrate on what we do best: researching, developing and offering our customers attractive solutions. In turn, we aim to raise our expenditures for research and development. We spent €1.8 billion in 2013. In absolute terms, this puts us at the top of the chemical industry.

Furthermore, we contribute our expertise to advance sustainable development: We are working together with United Nations, for example, on their Post-2015 Development Agenda. BASF has already been a part of the U.N. Global Compact network since 2000, which consists of companies, nongovernmental organizations, science and politics. In the past year, we established a committee to accompany us on our way toward more sustainability: Comprising experts from science and society, it advises BASF’s Board of Executive Directors on how to weave sustainability even more tightly into our operations.

Through this, we aim to continue generating even more attractive returns for you, our shareholders. The entire BASF team stands behind this goal.

Dr. Kurt Bock